"Did you hear that the company's owner died?"

"I heard. It's sad for the family and sad too for the employees that may be laid off because of the death tax."

Something like the above exchange will take place more and more in Hawai'i because of currently troublesome aspects of the estate tax — called the death tax by many. Americans consider the tax on death the most unfair of all the federal taxes.

For Hawai'i family businesses, the death tax may prevent children in the business from continuing with it, or severely handicap their ability to be successful with the business. Not only does the death tax tax some earnings twice — once while living and once upon death — it penalizes entrepreneurs for establishing a successful business and discourages others, including their children, from continuing businesses that would provide jobs and bolster the economy.

Support for a high estate tax rate is wrong. Much of a large family-owned business, after exemptions, would have to be liquidated to pay the government, in cash, at the occurrence of a family-business owner's death.

Some advocates of a high tax rate suggest continuing the tax rate, after exemptions, at its projected 2009 level of 45 percent. This high confiscatory tax rate, in fact, was proposed as a permanent rate by some of these advocates, now that a vote on permanent repeal of the tax is likely to come up in the Senate, perhaps as early as today.

Most auto dealers, like farmers, through the sweat of their brows over decades, have created working assets. Their cash is tied up in the businesses. For auto dealers, these assets are in the form of dealerships in our communities that are "working," providing thousands of jobs and services to Hawai'i's consumers. At the death of such owners, these assets are subject to the death tax.

Dealers have paid taxes on the income and revenues. But the death tax is often a fatal bite of the apple because the enormous size of the death tax rate forces the business to cut back or borrow at a time when the business can't afford to do either.

Many Hawai'i auto dealers spend millions of dollars over the life of their individual business on extra life insurance and estate planners needed to deal with the death tax. The money, however, could have been put to productive use to purchase new equipment, to pay for new employees or increase pay and benefits for current employees.

The Congressional Budget Office estimates the estate and gift tax will raise only about $24 billion for the $2.5 trillion federal budget for 2006. That's less than 1 percent. The anti-repeal camp dismisses the fact that more tax revenues would be generated if this tax money were left in productive working assets, reinvested in new revenue-producing ventures, or even paid to productive new employees — all activities that are already taxed.

These advocates of a high-rate compromise propose freezing the death tax at the upcoming 2009 levels — which is a $7 million exemption ($3.5 million per spouse), with the tax on amounts above the exemption at a whopping 45 percent rate.

A more reasonable solution, and one that is being talked about often in Washington, D.C., is to exempt $10 million ($5 million per spouse) and apply the capital gains rate of 15 percent on the remaining amount, using the value of the assets at death.

The 15 percent rate, since it matches the current 15 percent capital gains tax rate, has a ring of fairness and is not confiscatory, like the 45 percent rate, or even a 30 percent rate.

Right now, America, in effect, has the highest estate tax in the world. It's a tax that runs contrary to common sense and is hard to support. Some nations with Western-style democracies — including Canada, Australia and Israel — have already repealed their death taxes.

It's just plain wrong to tax death — especially since taxes have already been paid on earned income. Since publicly held companies are not subject to the death tax, the tax unfairly handicaps a family business trying to compete.

Proposed high-rate compromises, advocated by some, would continue to punish families — particularly those that are trying to hold on to the family business.

I believe that our two senators are willing to entertain a compromise solution, and I further hope that the 15 percent rate will be supported. Families have a much better chance of keeping the business and growing it at the capital gains rate — a fair and reasonable compromise solution.

David H. Rolf is a spokesman for the Hawai'i Automobile Dealers Association. He wrote this commentary for The Advertiser.